Essays on Asian Financial Crisis of 1997 Case Study

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The paper 'Asian Financial Crisis of 1997" is a great example of a finance and accounting case study.   The recent political shifts have resulted in a mismatch between the global financial market and state policies. In 1997, the Asian financial crisis generated fears of a global meltdown of the economy which resulted from financial corruption. Held et al. (1999) describes that the financial crisis first begun in Thailand through a decision initiated by the government of floating baht. Thailand had also accumulated foreign debt and this led to bankruptcy and collapse of the countries currency.

The crisis then spread to Asia and Japan which led to a slump on the currencies, increase of foreign debt, devaluing of stock markets and asset prices. The above study compares and contrasts the impact of the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008 in Dubai and Indonesia. The Asian financial crisis of 1997 collapsed the long term capital management hedge fund. The effect of this was the reduction of asset prices, an increase in the risk premium and reduced liquidity.

The decline of competitiveness in Asia led to the reduction of investment in other parts of the region. This, therefore, led to the fall of currency values causing a significant loss in the foreign currency and increased debts in banks. The reduction of foreign currencies needed intervention from the IMF in countries such as Thailand and Indonesia so as to be able to rescue various financial institutions. Noland et al. (1998) explain that the causes of the Asian financial crisis are connected to how businesses and government operate in the Asian region.

These include use of fixed exchange rates, implementation of large capital inflows, poor investments and failure of resolving financial crises in other countries such as Japan. Other major causes included poor operations in the international financial system, poor policies and weaknesses experienced in various financial institutions. Countries affected by the 1997 financial crisis suffered high rates of unemployment, increased rates of interest rates, high inflation and reduced growth rates as well as banks closure. Effect on Indonesia Indonesia as a country saw a great loss in its currency as a result of the Asian financial crisis.

Indonesia was affected by a low inflation rate, large surplus and foreign reserves as well as a stable banking sector. Companies in Indonesia used U. S dollars in borrowing before the crisis and their currency was strengthened as a result of this as its value rose. In 1997, the rupiah trading band widened by 4 percent and the floating exchange rate used as that moment was changed to the free-floating exchange rate which led to a great drop of rupiah value. The countries that had borrowed in U. S dollars faced increased costs as a result of the decline of their local currency (Smith 2007). Indonesia was given much support by IMF which included a mixture of funds with conditions of meeting the additional loans.

Countries affected by the 1997 financial crisis suffered high rates of unemployment, increased rates of interest rates, high inflation and reduced growth rates as well as banks closure. Indonesia experienced a crisis in the balance of payments and prices were eroded therefore causing a major impact on investment. The crisis also changed the structure of the economy through Indonesia was able to confront the financial crisis for example through the establishment of the Asian Commission that identified capabilities of recovery in the countries that were most affected.

References

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Muchhala, B 2007, Ten Years After, Revisiting the Asian Financial Crisis, Washington, DC: Woodrow Wilson International Center for Scholars Asia Program.

Noland, M, Li-gang, L, Sherman, R & Zhi, W 1998, Global economic effects of the Asian currency devaluations, Policy Analyses in International Economics, Washington, DC: Institute for International Economics.

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Watts, W 2009, Dubai woes roil financial markets: Stocks fall and government bonds rise on flight to quality. Market Watch, viewed 4 October 2011,

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